How COVID-19 is Impacting Defaults and Workouts in Europe

May 20, 2020

Since 2014, SitusAMC has worked out 16,000 non-performing loans across 15,000 properties with an unpaid principal balance (UPB) of €17 billion, across a range of European countries. SitusAMC Director Loan Advisory / Asset Management Olga Delval discusses trends she is seeing in the market, and the need for flexible, swift and country-specific workout strategies to ensure the best outcomes for investors.

How has the workout landscape evolved since COVID-19 appeared in Europe?

We are monitoring the market very closely, talking to borrowers and lenders, and we expect more defaults across the board as interest payment dates (IPD) approach. In Europe, borrowers make quarterly payments, so we lag behind the United States. April and May are both significant months for IPDs. For the moment lenders are tending to agree on covenant and payment waivers inasmuch as there is cash in the structure and borrowers are ready to put more equity into the deals. But it may not be the case in July. Although for the moment it is still about the cash flow and having sufficient underlying cash to make the debt service, values are starting to be affected as well across several sectors -- retail and hospitality being the obvious ones -- and will be more so in the coming months. In addition, before COVID-19 there were a number of NPL sales announced across Europe; many are now on hold and will likely remain so until we have more clarity.

What does the workout process typically include?  

Our European workout team specialises in commercial mortgage-backed securities (CMBS) transactions, where we are named primary and special servicer at the issuance; and in non-performing loans (NPL), in which we assist buyers of the largest transactions in the market to evaluate and underwrite those portfolios and create and implement workout scenarios. We develop and execute workout resolutions, negotiate with borrowers, oversee loan structures, and ensure enforcement and liquidation of collateral and corporate structures.

How does SitusAMC approach workouts?

We manage every workout on a case-by-case basis, and run multiple scenarios to determine the best outcome, which is why our experience is so valuable in this area. We design strategies using a variety of methods which are specific to the asset type, collateral value, geography, regulatory procedures and stage of default. For example, in the UK and Ireland, the loans that come to us typically involve significant later-stage defaults and often the strategy would have been enforcement of the loan covenants.

What is the biggest challenge to workouts in Europe?

Workouts differ significantly from country to country. Our professionals are experts in real estate, but also languages, legal systems and administrative protocols of their local geographies, which is especially key. In the United Kingdom and Ireland, the processes are more straightforward; in a default, the lenders enforce the mortgage or other security, appoint a receiver and sell the asset. In other parts of Europe – France, Germany, Italy, the Netherlands and Spain -- the legal procedures are more cumbersome, and it may take years before lenders can enforce and assets are disposed of. It is therefore often beneficial to first try and implement a consensual workout with borrowers and cooperate in striking a deal thus maximising recoveries to the lenders or noteholders.

What other factors can come into play?

In every workout we examine the relationship between the sponsors and the borrowers and the nuances of the situation. If for example we are dealing with a strong sponsor who had managed the assets for a long time and defaulted on loan covenants or loan maturity due to the economic situation or maturity simply coming at the wrong time, it might be economically beneficial to consensually workout the loan. An enforcement in such a situation would trigger higher costs, a longer timeframe to realisation and therefore a larger loss to the lender or noteholders. If on the other hand, we are dealing with a litigious borrower who is unwilling to cooperate, the enforcement route is the most likely option. Sometimes borrowers recognise that they have lost all equity in the deal and just hand over the keys of the assets. 

How can lenders be proactive in this uncertain environment?

SitusAMC provides services across the entire lifecycle of the loan, therefore a lot of lenders and noteholders come to us for advice or guidance as to what is happening in the market. We manage 62 billion AUM in our primary servicing business; 26 billion AUM in our asset management business; 5 billion AUM in our Loan Advisory NPL business and oversee quarterly gross asset values of more than $300 billion in our globally integrated valuation platform. Some skill sets are complementary, we interact between our teams all the time and cooperate on various projects. In the current environment, as loans in asset management move onto the watch list, our asset managers are connecting with borrowers, noteholders and sponsors on a regular basis, reviewing valuations, talking with the valuers and helping clients to re-underwrite the positions. We can proactively prepare for a default, which helps maximise and speed recoveries to the lenders. Our teams are flexible, so we can quickly and easily allocate skill sets and resources across the company depending on the need.

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